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Administration Summit Looks for Private Investment in U.S. Infrastructure

Thursday, September 11, 2014

As part of President Obama’s Build America Investment Initiative, launched in July, the Secretaries of the Treasury and Transportation were charged to lead a working group that would consider increasing private investment in major infrastructure. This week, the U.S. Department of the Treasury and the Department of Transportation (DOT) hosted a Summit for leaders from the private sector and senior Administration staff to discuss the issues and begin to form the recommendations that the working group must submit to the President by November 14. As part of the Initiative and the Summit, Treasury released a report, entitled, Expanding Our Nation’s Infrastructure through Innovative Financing. A copy is attached.

Many of the same themes heard at the U.S. House Transportation Committee’s P3 Panel hearings throughout 2014 also emerged in the Administration’s discussions this week. One important difference in the Treasury report is that it cites the patchwork of state P3 laws as one of the most significant obstacles for private investors in the developing P3 markets in the U.S.The development of a federal model for the states to use as an enabling act for P3s was raised at the Summit. Not all states have enacted P3 laws, and among those that have a law, some laws are broad enabling statutes while others are more limited or are for specific projects only. The legal framework in some state P3 laws clearly defines the terms of entry and exit in a P3 for private investors, while other laws are vague.Some state P3 laws require layers of approval for a P3.

The Treasury report notes that there is a need for greater financial expertise in state agencies and legislatures and better coordination among the states in dissemination of P3-related information. In the panel discussions at the Summit, the need for centralizing, institutionalizing and standardizing the P3 process in the U.S. and making expertise available to public contracting entities in terms of whether to let a project as a P3 and the best practices for such projects was mentioned throughout the Summit.

At the Summit, Treasury Secretary Jack Lew spoke on $1 trillion funding gap for transportation, water and electricity needs between now and 2020.Treasury will commission an independent report to identify the most significant transportation and water projects under consideration in the U.S

Secretary of Commerce Penny Pritzker highlighted the Select U.S.A. division of the Department, which serves to attract investors to the U.S. Select U.S. will conduct an investment summit in March 2015, which will focus on investment in infrastructure.

Department of Transportation Secretary Anthony Foxx announced key investments in P3 projects, including a $905 billion TIFIA loan for the Florida I-4 project, which will be the largest TIFIA loan ever to a P3.He also announced a $1.2 billion private activity bond for the Pennsylvania DOT, which will be used for a rapid bridge replacement project seeking to replace over 600 bridges, and the availability of a $20 million investment for a new transit development project.

Secretary Foxx also highlighted the recent opening of the DOT’s Build America Transportation Investment Center, which he explained was designed to foster the development of P3 projects by offering a navigator service for federal, state and local public agencies to identify projects currently under consideration that could qualify for a P3 and to offer technical assistance and best practices for P3 projects. The Center may develop model enabling legislation for states to use for P3 projects.

Other panelists at the Summit suggested that the new DOT Center would be a good place for public entities to compare notes on the successes and failures of P3s in other jurisdictions, to collect best practices from around the world, and ultimately to certify public entities that have been successful with P3s.Many panelists agreed on the need for best practices, especially in the key areas of design, financing and construction. One panelist urged the states to develop “centers of excellence,” which is a concept that SFAA’s Government Affairs Advisory Committee discussed at its recent meeting. Such entities are used in other countries as sources of education and guidance for government officials considering the use of P3s. Centers of Excellence are quasi-public entities that bring together perspectives of experts in local and state governments, regional planning agencies and academia in order to assist all levels of government in their evaluation of P3 proposals. Such Centers are partners with the state and local agencies throughout the P3 procurement process, providing them with education and expertise on issues while leaving the ultimate decision on P3 to the public contracting entity.Funding has been a major obstacle to the creation of these entities in the states.

Consistent with the U.S. House Transportation Committee’s Panel on P3s hearings this year, panelists at the Administration’s Summit this week mentioned the importance of clarity in the P3 laws for investors, the need for a local champion for a P3 project and community buy-in that the P3 will benefit them and local business and the need to expedite and streamline the permitting and environmental reviews for P3s.Several panelists agreed that there is a need for institutionalizing and/or standardizing the process under which public agencies collaborate for permitting and environmental reviews and other portions of P3 project. Panelists also cited the need for a long-term reauthorization of the federal highway act.It is difficult to plan and commit to a long term P3 project when the highway act has become a series of short-term extensions. The U.S. experience with P3s generally has been on a pilot test basis, which is not sustainable.A programmatic approach is needed.

The attached Treasury report cites three P3 projects as success stories in the U.S:the Denver FasTrack commuter and light rail project, Goethals Bridge project linking New York City and New Jersey and that Bayonne Water Joint Venture, a wastewater P3 in New Jersey.

The Treasury report additionally demonstrates that there currently is a significant amount of federal funding invested in P3s.The reports list the innovative methods of infrastructure that have been used in the U.S. and notes that all P3s today combine one or more of the following forms of financing:

--Transportation Infrastructure and Innovation Act(TIFIA): This infrastructure bank provides long-term flexible financing to highway and transit projects through loans, loan guarantees and lines of credit at below market cost to lower the cost of capital.TIFIA loans accounted for 23% of the total P3 project value and 35% of P3 debt between 2008-2003.Its capacity was increased in fiscal 2014 so that it can now support $20-$30 billion in total project value. The President’s fiscal 2015 budget retains this increased capacity for TIFIA.

--Direct Pay Bonds: These are taxable bonds that state and local governments issue for which the federal government directly subsidizes the interest expense. In 2009-2010, the states issued over $185 billion Build American Bonds, which saved $20 billion compared to what their borrowing costs would have been with issuing tax exempt bonds. The President’s fiscal 2015 budget would make direct bonds a permanent option for state and local governments.

--Private Activity Bonds (PABs): These are tax-exempt bonds that state and local governments issue on behalf of private developers on a specific project.For 2008-2013, PABs accounted for 17% of total P3 project value and 25% of project debt.For fiscal 2014, almost $3 billion has been authorized for P3 projects and nearly $500 million PABs have been issued.The President’s fiscal 2015 budget would expand the total volume for transportation PABs from $15 to $19 billion.

The Treasury report concludes that the economic case for infrastructure investment is clear, but such investment currently is declining.The Treasury and DOT working group will be discussing the following issues--attracting more private investment, making P3s more attractive to both investors and state and local governments, finding ways to effectively bundle smaller projects to create projects that are attractive to investors, encouraging cross jurisdictional collaboration and making more productive use of existing federal credit program to support infrastructure investment—before making its recommendations to the President.